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S. HRG.

108478

MONOPSONY ISSUES IN AGRICULTURE: BUYING


POWER OF PROCESSORS IN OUR NATIONS
AGRICULTURAL MARKETS

HEARING
BEFORE THE

COMMITTEE ON THE JUDICIARY


UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 30, 2003

Serial No. J10851

Printed for the use of the Committee on the Judiciary

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COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, JR., Delaware
MIKE DEWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas JOHN EDWARDS, North Carolina
BRUCE ARTIM, Chief Counsel and Staff Director
BRUCE A. COHEN, Democratic Chief Counsel and Staff Director

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CONTENTS

STATEMENTS OF COMMITTEE MEMBERS


Page
Craig, Hon. Larry E., a U.S. Senator from the State of Idaho ............................ 1
prepared statement .......................................................................................... 116
Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin ............. 9
prepared statement .......................................................................................... 123
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa ..................... 2
prepared statement .......................................................................................... 125
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah, prepared
statement .............................................................................................................. 138
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin ....................... 6
prepared statement .......................................................................................... 140
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 5
prepared statement .......................................................................................... 142

WITNESSES
Bailey, DeeVon, Professor and Extension Economist, Department of Econom-
ics, Utah State University, Logan, Utah ............................................................ 20
Carstensen, Peter C., George Young-Bascom Professor of Law, University
of Wisconsin Law School, Madison, Wisconsin .................................................. 25
Cotterill, Ronald W., Professor of Agricultural and Resource Economics, Uni-
versity of Connecticut, Storrs, Connecticut ........................................................ 22
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa .................................. 8
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, Department
of Justice, Washington, D.C. ............................................................................... 11

QUESTIONS AND ANSWERS


Responses of R. Hewitt Pate to questions submitted by Senators Grassley
and Leahy ............................................................................................................. 34

SUBMISSIONS FOR THE RECORD


Alabama Contract Poultry Growers Association, American Farm Bureau Fed-
eration, Campaign for Contract Agriculture, Consumer Federation of Amer-
ica, Georgia Poultry Justice Alliance, Humane Society of the United States,
National Contract Poultry Growers Association, National Farmers Union,
North Carolina Contract Poultry Growers Association, Organization for
Competitive Markets, Rural Advancement Foundation International-USA,
Sustainable Agriculture Coalition, United Poultry Growers Association,
joint letter ............................................................................................................. 43
Bailey, DeeVon, Professor and Extension Economist, Department of Econom-
ics, Utah State University, Logan, Utah, prepared statement ........................ 45
Butler, J. Dudley, Yazoo County, Mississippi, statement .................................... 50
Carrington, Paul D., Chadwick Professor of Law, Duke University, statement 55
Carstensen, Peter C., George Young-Bascom Professor of Law, University
of Wisconsin Law School, Madison, Wisconsin, prepared statement ............... 58
Cotterill, Ronald W., Professor of Agricultural and Resource Economics, Uni-
versity of Connecticut, Storrs, Connecticut, prepared statement .................... 84
Dobbs, Mabel, Western Organizationof Resource Councils, Billings, Montana,
statement .............................................................................................................. 118
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared state-
ment ...................................................................................................................... 128
Harl, Neil, Professor, Iowa State University, Ames, Iowa, statement ................ 130
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IV
Page
National Council of Farmer Cooperatives, Washington, D.C., statement ........... 145
Organization for Competitive Markets, Lincoln, Nebraska, statement .............. 148
Pate, R. Hewitt, Assistant Attorney General, Antitrust Division, U.S. Depart-
ment of Justice, Washington, D.C. prepared statement ................................... 154
Wellington, Robert D., Senior Vice-President for Economics, Communications
and Legislative Affairs, Agri-Mark Dairy Cooperative, Lawrence, Massachu-
setts, statement .................................................................................................... 169

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MONOPSONY ISSUES IN AGRICULTURE: BUY-
ING POWER OF PROCESSORS IN OUR NA-
TIONS AGRICULTURAL MARKETS

THURSDAY, OCTOBER 30, 2003

UNITED STATES SENATE,


COMMITTEE ON THE JUDICIARY,
Washington, DC.
The Committee met, pursuant to notice, at 2:39 p.m., in room
SD226, Dirksen Senate Office Building, Hon. Larry Craig pre-
siding.
Present: Senators Craig, Grassley, Specter, Leahy, Kohl, and
Feingold.
OPENING STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR
FROM THE STATE OF IDAHO
Senator CRAIG. The Committee on the Judiciary will be in order.
We tackle and interesting and fascinating topic today: Monop-
sony Issues in Agriculture: Buying Power of Processors in our Na-
tions Agricultural Markets. Let me start by welcoming our distin-
guished panel of witnesses here today to discuss an issue that is
very significant in American agriculture. We are here to discuss
the marketplace in which nearly 2 million U.S. agricultural pro-
ducers operate.
Those 2 million are directly responsible for feeding you, me, and
this country, and in many instances people all around the world.
First, I think it is important to recognize that enhanced and ad-
vanced communications systems and technologies have heavily con-
tributed to a more integrated world. Our economy faces increas-
ingly stronger global influences and market forces. New economic
relationships and the United States resources and leadership in
building these relationships around the globe have set the stage for
the opportunities and the challenges that our domestic industries
now encounter.
In the agricultural industry, this is particularly true. The agri-
cultural sector is unique and involves very complex economic mod-
els and relationships when compared to others. I believe no other
industry faces the same degree of uncertainty and risk that those
roughly two million producers and their families encounter on a
daily basis.
It is this uniqueness and attention to risk in our agricultural in-
dustry that brings us here today. Agricultural producers are des-
perately trying to operate in a marketplace that demands low end-
use prices, yet high quality through increased efficiencies, and how
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to increase producer profitability, although subjected to the status


of a price taker, not a price maker.
It is no secret that todays domestic market, especially in the
livestock and value-added arenas, has witnessed a significant shift
from supplying meat cuts for consumers through farmer markets in
the local town square, to shipping livestock hundreds or even thou-
sands miles away to the a large packing and processing plant
whose products eventually reach millions.
With this in mind, it is important to note that within the U.S.,
markets differ significantly by region. In the Northwest, our pro-
ducers must shift their crops or livestock through limited means to
markets that are few and far between. The traditional sales yard
is still prevalent, yet becoming very rare. In contrast, areas such
as the Midwest contain vastly larger herds that supply a much
greater number of processors who may be just down the road from
the farm.
Just recently one of only a few remaining packing plants in my
State closed; 272 people were immediately looking for new jobs. Al-
though this may be deemed a small operation by some standards,
it represents a larger issue that producers are becoming increas-
ingly aware of the importance that risk mitigation plays in their
operational plans.
Contractual arrangements with buyers are proving more popular
to combat risk, and I believe it is the responsibility of those in Con-
gress and in regulatory positions to ensure that these arrange-
ments are fair and not exploited.
Today, we will receive testimony from our panel that will explore
their actions and thoughts on this issue of fairness in todays agri-
cultural markets, and how the terms monopsony and monopoly
adhere to this vital sector of our economy.
I hope the hearing will help shed some light on the frustration
that I and my colleagues have experienced most recently in the
2002 farm bill, in sifting through all of these complicated issues.
Again, we welcome you and we look forward to your testimony.
Before I turn to our witnesses, let me recognize one of my col-
leagues on the Judiciary Committee, Senator Grassley.

STATEMENT OF HON. CHARLES GRASSLEY, A U.S. SENATOR


FROM THE STATE OF IOWA
Senator GRASSLEY. Thank you, Mr. Chairman. I appreciate your
providing an opportunity for this important discussion of the nega-
tive impact of monopsonistic control and the impact it can have on
family farmers and rural America.
Monopsony is to buying as monopoly is to selling. When family
farmers have limited options to market their commodities, they
face potential monopsonistic conditions. For decades, the Govern-
ment has aggressively protected Americas consumers through the
Sherman and Clayton Acts from monopolistic activities. Unfortu-
nately, the concept of monopsonies has not seemingly drawn as
much attention.
Today, I hope that we take this opportunity to focus on how the
Department of Justice attempts to identify monopsonistic practices.
While I believe Justice attempts in good faith to remedy

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monopsonies when it finds a problem, I worry that the calf has not
found the creep when it comes to this issue.
I am concerned that the Department of Justice doesnt have the
agricultural specialists on board who understand the unique mar-
keting dynamics that farmers experience in their relationship with
industry. The Department of Justice cant remedy the problem un-
less it understands the potential harm.
To the Department of Justices credit, it has challenged or lim-
ited agricultural and agribusiness mergers in the past due to
monopsonistic concerns. I know that Assistant Attorney General
Pate has laid out many examples in his testimony of the Depart-
ment of Justices interest in keeping markets competitive.
One example of the Departments commitment that Mr. Pate did
not describe is United States v. Rice Growers Association. Justice
tried this case in 1986 and challenged the purchase of one milling
firm buying another milling firm. The Department found that with-
in the regional market, the new entity would control 60 percent of
the rice purchased and that was found unacceptable to the Depart-
ment.
Clearly, DOJ has the authority to act. I am just not certain that
this Department of Justice, or for that matter any Department of
Justice in recent history has hired professionals with the expertise
and background to identify the actual markets being affected.
For instance, 87 percent of all hogs are contract or packer-owned
pigs. That means that only 13 percent have the potential to be
open or spot market pigs for slaughter. Over 90 percent of the hog
marketing contracts are based on the composite spot market price
to establish the base value. Many hogs not bound to written con-
tracts are sold under oral formulas. The value of these types of oral
agreements does not necessarily track with spot market value. In
addition, hogs sold outside the western corn belt dont contribute
substantively to the mandatory price reporting data.
I have seen estimates that of the 13 percent of the hogs deemed
open market pigs for slaughter, only 3 to 5 percent traded daily are
actually legitimate spot market pigs. The 3- to 5-percent figure sets
the price daily for 90 percent of the pigs that packers have under
marketing contracts.
It should be easy to understand that as the actual spot market
thins out, if packers choose not to participate in the spot market
everyday, packers potentially will be able to manipulate the spot
market price and influence the worth of marketing contracts. I feel
strongly that we need to be on the look-out for this type of manipu-
lation of the marketplace.
Unfortunately, the potential for this type of manipulation grew
considerably when Smithfield, the worlds largest vertical inte-
grator, acquired Farmland. Department of Justice staff informed
my office that the Justice Department did not believe that this
transaction met any threshold to justify challenging the acquisi-
tion. Justice explained that there would still be multiple pur-
chasers in the western corn belt after this merger took place.
I have tried to take a look at the packers participating in the
southern Minnesota, all of Iowa, South Dakota, and the Nebraska
region. Unless the Department of Justice believes that a family
farmer which produces 2,000 hogs per year, selling 40 per week,

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using a trailer pulled by a pickup can reasonably be expected to de-


liver hogs up to 300 miles away from his farm, we definitely have
a problem.
On a related topic, I would be remiss if I did not take this oppor-
tunity to voice concern not only for the spot markets impact on
contracts, but for the construction of producer contracts. As the
lead sponsor of the Fair Contracts for Growers Act, S. 91, I am very
concerned about the abuse of arbitration clauses in take-it-or-leave-
it non-negotiable contracts such as those that are typical in the
livestock and poultry sectors.
Certainly, arbitration, if agreed to voluntarily by both parties in-
volved, can be a useful tool for resolving disputes. But what we are
now seeing in the livestock and poultry sectors is that arbitration
clauses are being forced on farmers not as a legitimate alternative
dispute mechanism, but as a mechanism to prevent farmers from
challenging the abusive actions of large packers or integrators.
Farmers who are forced into arbitration proceedings are rarely,
if ever, successful. In large part, this is because the process is
stacked against them because arbitration does not allow for the
right of discovery. If a farmer is attempting to prove that he has
been treated unfairly or has been the victim of fraud, all the data
that would allow him to argue his case is completely controlled by
the company being accused of misdeeds. Without access to that
data through the normal discovery process, it is impossible for a
farmer or any grower to prove their case.
Lastly, arbitration proceedings are not part of the public record.
By forcing growers to sign away their rights to resolve disputes in
court, livestock and poultry companies are able to limit public
knowledge about any abusive practices.
So it is easy to understand why large, vertically-integrated live-
stock and poultry companies might see the benefits of including
mandatory arbitration clauses in their contracts. Unfortunately, we
understand that farmers are often put in a position that they ei-
ther have to sign the contract presented to them or face bank-
ruptcy.
The Chairman of this Committee was the lead sponsor of a bill
in the last Congress which addressed concerns about the abuse of
mandatory arbitration clauses in contracts between auto manufac-
turers and car dealerships. That legislation, which is nearly iden-
tical in structure to the bill that Senator Feingold and I have intro-
duced, is now law.
Our legislation would simply specify that both parties in a live-
stock or poultry contract must agree in writing to pursue arbitra-
tion after the dispute arises to assure that farmers choose the arbi-
tration voluntarily. It is my hope that we will be comfortable af-
fording farmers the same protections against abusive contract
terms that we have provided for the car dealers of America.
In conclusion, I thank the Chairman for this hearing. I look for-
ward to working with both the Committee and the Department of
Justice to further explore this issue. I would also like to submit for
the record the testimony of Dr. Neil Harl, from Iowa State Univer-
sity, whom we invited to testify today but had a conflict.
Senator CRAIG. Thank you very much, Senator Grassley. Of
course, that will become part of the record.

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Now, let me turn to the Ranking Member of the full Committee,


Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR
FROM THE STATE OF VERMONT
Senator LEAHY. Thank you very much, Mr. Chairman. I do want
to thank the Committee for holding this hearing examining the
buying power of processors in our Nations agricultural markets.
I am glad to see our witnesses here. Dr. Cotterill, I am glad to
have you here. He is Professor of Agricultural and Resource Eco-
nomics at the University of Connecticut. I have worked with him
a lot on daily matters over the years.
Monopsony is not an easy word to say, as we have all found, each
one of us, as we have scrambled with that. What it means, though,
is pretty easy to understand. It is the increasing power of large,
concentrated agricultural processing firms and their ability to
lower the prices received by farmers who supply them with milk
and meat and grain. This trend is having a tremendous impact on
the lives and livelihoods of American farmers in virtually every re-
gion of this country.
In my own State of Vermont, agriculture is a vital industry, and
dairy is the most significant part of that. It accounts for roughly
three-quarters of our States net farm income. For decades, dairy
farmers seemed immune from the consequences of restructuring be-
cause, through their cooperatives, they also served as milk proc-
essors for the local or regional markets. National markets didnt
exist.
That has changed dramatically over the past few years. As a re-
sult, our farmers are not getting a fair share of the retail price of
milk, but giant corporate processors are raking in anticompetitive
profits at the same time they are raising prices to consumers. The
price goes down to the producer, the price goes up to the con-
sumers, and these conglomerates get the money.
My major concern in New England relates to Dean Foods, Inc.,
which merged with Suiza Foods in 2001 and formed the large milk
processing company, not in the region, but in the world. I was real-
ly surprised and disappointed when the Justice Departments Anti-
trust Division approved this merger because it meant that the new
company would control almost 70 percent of all the milk supply
throughout all of New England.
They achieved this by buying up local dairies and then, of course,
immediately closing them down. Actually, Dean Foods controls
more than 30 percent of all milk production nationally, in addition
to a lot of other alliances they have.
I have been concerned about last years proposed merger between
H.B. Hood and National Dairy Holdings. I led a bipartisan group
of 10 Senators in asking the Justice Departments Antitrust Divi-
sion to investigate the merger. It would allow one company, Dairy
Farmers of America, to control more than 90 percent of the New
England fluid milk supply. Fortunately, because the Antitrust Divi-
sion actually looked at it, H.B. Hood withdrew its original plan, in
May, and it is now being restructured.
The opportunity for dairy farmers to market their milk independ-
ently is practically gone. Today, two cooperatives control access to

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most of the Nations processing facilities. They are using this access
to expand further. It is not good for daily farmers, it is not good
for other market participants, it is not good for consumers.
In a competitive market, if input costs fall, competition tends to
drive consumer prices lower, and that makes sure that manufactur-
ers dont get windfall profits. But that doesnt work in the dairy in-
dustry. Retail prices for fluid milk are virtually unchanged this
year, even though prices that farmers receive are off 50 cents per
gallon.
I think the Justice Department should still investigate why lower
farm prices for milk have not been passed on to consumers. I have
asked the General Accounting Office to investigate this disparity
between farm and retail milk prices. It is not just important for
Vermont; it is important for the daily industry country-wide to es-
tablish greater protections against market abuses by huge agri-
businesses.
I think the American people and the farmers who produce Amer-
icas agricultural goods deserve strong watch-dogging by their Gov-
ernment. If we have strong watch dogs here, it works, and it is
going to help the market opportunities for Americas farmers and
ranchers. It is also going to protect farmers and ranchers against
those who have such enormous power to just overcome anything
they might do.
Mr. Chairman, I have a much longer statement and I would ask
to put it in the record.
Senator CRAIG. Without objection, your full statement will be-
come a part of the record. Thank you very much for that.
[The prepared statement of Senator Leahy appears as a submis-
sion for the record.]
Senator CRAIG. Let me turn to another member of our Com-
mittee, Senator Herb Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator KOHL. Thank you, Mr. Chairman. Thank you for holding
this hearing to examine the troubling trend of increased concentra-
tion in the agricultural industry.
The alarming transformation of rural America continues. In-
creased concentration on the buyer side has dramatically shrunk
the market for farmers and driven many out of business. It is clear
that now more than ever, we need vigorous and aggressive enforce-
ment of our antitrust laws to prevent concentration that harms
competition in this marketplace.
We need to seriously examine whether our antitrust laws are
being properly enforced to prevent excessive agricultural consolida-
tion. Antitrust enforcement should not permit the creation of domi-
nant market power by a buyer of agricultural products any more
than it would permit the creation of a monopoly by a seller. In ad-
dition, antitrust regulators should be sensitive to the effects of con-
solidation in regional markets, as many agricultural products are
perishable.
We must ensure that the Justice Department devotes sufficient
resources and staff to the agricultural sector. Our farmers and
ranchers, less than 2 percent of our population, produce the most

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abundant, wholesome, and by far the cheapest supply of food in the


world. Yet, prices fall for farmers as they find fewer and fewer buy-
ers for their products. And despite this, prices stagnate or even rise
for our consumers.
This trend is evident across commodities. From 1993 to 2001, the
share of hogs sold through contractual arrangements increased
from 10 percent to 72 percent. In poultry, nearly 100 percent of the
market depends on contractual arrangements.
Of greater concern to me, the dairy industry is experiencing the
effects of processor concentration. Dairy producers in Wisconsin
and around the country recently emerged from a 20-month period
where milk prices hit a 25-year low. The U.S. fluid milk market is
a $23 billion-a-year industry. The combination if Suiza and Dairy
Farmers of America now controls approximately 70 percent of the
fluid milk processing and distribution in 13 northeastern States.
This concentration in buying power at the processor and retail
level has not led to lower prices for consumers. In fact, 2 months
also when the national average price paid to farmers for fluid milk
declined by 13 percent, the average national retail price paid by
consumers at the grocery store declined by only 5.5 percent.
Rural America is in crisis. Their way of life and economy, count-
less communities, and too many farm families are struggling be-
cause there is a dwindling free market for American agricultures
superior product. We need to revisit the way our antitrust laws are
being applied to agriculture. We need to discard the outmoded doc-
trine that buying power is treated with a lower degree of scrutiny
than the aggregation of selling power.
Dominant buying power among food processors ought not to be
permitted any more than a monopoly among food retailers. Domi-
nant regional market shares should be permitted no more than
dominant shares in national markets.
We need to ensure that the Justice Department enforcement
tools are adequate to do their very important job. We were pleased
several years ago when the Justice Department appointed at our
request a special counsel responsible for competition in agriculture.
However, serious questions have been raised as to whether the Jus-
tice Department has devoted sufficient resources to this task. We
need to scrutinize the Antitrust Division to ensure that it is devot-
ing sufficient resources and manpower to competition in agri-
culture.
We are pleased to welcome our witnesses, and for me particularly
Peter Carstensen, from the University of Wisconsin Law School. I
have always been impressed with Mr. Carstensens work on this
issue, and so we all look forward to a productive hearing.
Thank you, Mr. Chairman.
Senator CRAIG. Senator, thank you very much.
Now, let us turn to our first panel and our first panelist, Senator
Tom Harkin, of course, Ranking Member of the full Senate Ag
Committee. We know that these are issues awfully important in his
home State.
Senator please proceed.

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STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM
THE STATE OF IOWA
Senator HARKIN. Thank you very much, Mr. Chairman, and
thank you for the opportunity to be here and for holding this hear-
ing. I, first of all, want to associate myself with the statements I
heard from Senator Grassley, Senator Leahy and Senator Kohl. I
think they are right on the mark on this, and perhaps some of the
things I will say will be repetition, but maybe just with a little dif-
ferent slant.
The consolidation horizontally and vertically in the processing
and retail sectors of our food industry is a real problem facing rural
America. We sometimes forget that the goal of antitrust policy was
to protect small firms, like independent farmers, that sell their
goods. As Senator Kohl pointed out, it is not just the buyers, but
also the sellers that need to be protected when they deal with an
anticompetitive and consolidated market.
As ranking member, as you point out, Mr. Chairman, of the Agri-
culture Committee, I am too familiar with the numbers. Eighty
percent of steer and heifer slaughter is controlled by four firms.
Soon, 64 percent of all hog slaughter will be controlled by 4 firms.
You have heard a couple of people speak about the dairy industry
and what is happening in certain parts of our country in the dairy
industry.
Well, just as these industries have become more horizontally con-
solidated, they have also increased the use of vertical arrange-
ments. Hog packers now have 80 to 90 percent of their supply tied
up in some type of a vertical arrangement. These are just a few ex-
amples of the increased horizontal consolidation and vertical inte-
gration in agriculture.
The essential problem with consolidation and vertical integra-
tion, when taken too far, is that such trends reduce choice and effi-
ciency in the marketplace. The lack of choice leads to unequal bar-
gaining power in business relationships. With unequal market
power, the more dominant firm will always take advantage of the
more vulnerable party by squeezing price, shifting liabilities, or de-
manding certain terms without paying an associated price.
Again, as Senator Kohl pointed out, Congress enacted the Sher-
man and Clayton Acts not only to protect consumers from sellers
who have too much power, but also to protect sellers from buyers
who have too much power.
One of the most disturbing news that we have seen out our way
is the recent acquisition of Farmland Foods by Smithfieldagain,
just another example of what we are talking about here. Many of
us wrote letters and signed on to letters to the Attorney General
expressing grave reservations about Smithfield acquiring Farm-
land. But the Department seemed to ignore the concerns of inde-
pendent producers and they let the deal go through untouched.
Of course, Smithfields acquisition of Farmland will strengthen
its leverage over family pork producers and represents even more
concentration and vertical integration in the already rapidly con-
solidated pork processing industry.
Smithfields version of hog production in which it owns all of the
hogs and reaps all of the entrepreneurial profit does not bode well
for the future of the rural Midwest. Smithfield has a history of

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shutting down plants that it buys. Yet, even if the plants remain
open, the market would still lose a buyer and become even more
concentrated. But despite Smithfields past actions and the poten-
tial degree of control they would hold over the sector, the Depart-
ment of Justice allowed the acquisition to go through untouched.
As Ranking Member of the Ag Committee, I realize the job of ad-
dressing competition problems in agriculture does not lie solely
with your Committee. The Ag Committee has jurisdiction over the
Packers and Stockyards Act, the Agricultural Fair Practices Act,
and the Perishable Agricultural Commodities Act.
Again, all of these laws are designed to protect producers from
unfair trade practices or help producers gain bargaining power
through cooperatives. In fact, one of the reasons I wanted to testify
today, Mr. Chairman, was to invite more cooperation between our
two committees to work together to protect farmers against unfair
and anticompetitive conduct.
In conclusion, I want to thank you for convening this very impor-
tant hearing. This may not make the front page of the New York
Times. It may not be the headline on the CBS Evening News, but
in terms of the number of people that are being affected by this
horizontal consolidation and vertical integration in agriculture, it
probably dwarfs anything the news is going to cover tonight, or to-
morrow on the front page.
Whether they realize it or not, this ripples through the food
chain. It ripples through the food markets, through the grocery
stores, and right down to the consumer level. So that is why the
business you are about is important for the free market, and it is
important for our producers as well as our consumers.
Thank you very much, Mr. Chairman.
Senator CRAIG. Senator Harkin, thank you very much for that
statement.
Senator Feingold, we have allowed opening statements by all of
our colleagues today. So if you so have, please proceed.
STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR
FROM THE STATE OF WISCONSIN
Senator FEINGOLD. Thank you, Mr. Chairman. That is very kind
of you.
I appreciate your holding this hearing to shed light on an impor-
tant issue for farmers and their families. I must say I am awfully
pleased to be with this group of Senators, including Senator Har-
kin, all of whom have shown enormous leadership in this area.
I appreciate the opportunity to briefly share my views on the
power of buyers in our agricultural markets. Increased consolida-
tion and market concentration are, without question, a very signifi-
cant concern for producers throughout the Nation. As I travel
throughout my home State of Wisconsin, these issues are raised
constantly by farmers and growers.
Monopsony power is a serious concern because this power can so
easily be abused. When there is only one buyer of a commodity,
farmers fear that the price that they receive and the terms of the
transaction will be unfairly biased against them. Farmers are
rightfully troubled by inadequate market access, price discrimina-
tion against the small independent producer, and, of course, the

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loss of negotiating power for the men and women who actually
produce the product.
I am pleased to be an original cosponsor of the Fair Contracts for
Growers Act of 2003, and I have been delighted to work with Sen-
ator Grassley on this issue. It addresses one unfair resultmonop-
sony power in this industry. It is designed to provide greater fair-
ness in the arbitration process relating to livestock and poultry
contracts.
I believe that arbitration can be an effective and appropriate
method to resolve disputes between farmers and those who pur-
chase their products, but only when both parties voluntarily par-
ticipate. Many farmers, however, due to their disadvantaged eco-
nomic position, are forced to sign contracts presented to them by
large processing firms that include mandatory arbitration clauses.
There is no negotiation between the farmer and the processor in
these instances. Farmers must accept the contract as written,
waiving their constitutional right to have their disputes under the
contract decided by a trial by jury.
I would like to submit a letter for the record, Mr. Chairman,
from numerous farm and consumer organizations, as well as advo-
cates for animal protection in rural communities, expressing their
support for the Fair Contracts for Growers Act.
Senator CRAIG. Without objection.
Senator FEINGOLD. Thank you, Mr. Chairman.
The Senate and this Committee have both demonstrated strong
bipartisan support for rectifying the injustices of mandatory arbi-
tration. During the debate on the farm bill in the last Congress, I
offered an amendment with Senator Grassley to prohibit the use of
mandatory arbitration clauses in livestock and poultry contracts.
Our amendment passed the Senate by a vote of 63 to 31, but it was
dropped in conference.
This Committee has supported similar arbitration measures in
the past, such as the auto dealer arbitration bill that the Chairman
worked to enact in the 107th Congress. The Fair Contracts for
Growers Act addresses only one piece of this complex business rela-
tionship in agricultural markets that are becoming increasingly
concentrated. The growing concentration of agricultural buyers
raises serious questions about the Department of Justices enforce-
ment of existing laws, as well as the adequacy of those laws to en-
sure a fair, open, and equitable market.
Again, I thank the Chairman for letting me speak.
Senator CRAIG. Thank you very much, Senator.
Now, let us turn to our second panelist and ask him, if you, Mr.
Pate, to please come to the table.
Our second panelist today is R. Hewitt Pate, the Assistant Attor-
ney General for Antitrust. Mr. Pate became the Assistant Attorney
General for Antitrust this past June, but served as an Acting As-
sistant Attorney General from November 23, 2002, until his con-
firmation by the Senate.
My guess is that some of our colleagues might be, and have al-
ready been a bit critical of actions by or failure to act by the Office
of the Attorney General on certain issues. So we are anxious to
hear from you, Hewitt, as it relates to the work that is underway
in the Justice Department on these critical issues.

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11
STATEMENT OF R. HEWITT PATE, ASSISTANT ATTORNEY GEN-
ERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE,
WASHINGTON, D.C.
Mr. PATE. Thank you very much, Mr. Chairman and members of
the Committee. I would start by saying that I welcome the scru-
tiny. In our system of Government, that is how we improve our
public institutions, and so I appreciate the opportunity to appear
before this Committee today.
I have a longer written statement, but I would like to begin with
a briefer statement, if I may.
Senator CRAIG. Your full statement will be a part of the record.
Thank you.
Mr. PATE. Thank you, Mr. Chairman.
The agricultural marketplace, as many of you have mentioned, is
undergoing significant changeinternational challenges, techno-
logical innovation, and new forms of business relationships. In the
midst of these changes, farmers are rightly concerned about wheth-
er agricultural markets are remaining competitive. We take these
concerns very seriously. We know that competition at all levels in
the production process leads to better quality, more innovation, and
competitive prices. Enforcement of the antitrust laws can benefit
farmers as purchasers of goods and services that allow them to
grow crops and raise livestock, just as it also protects consumers
of the crops that they raise and sell.
We have been very active in enforcing the antitrust laws in the
agricultural sector. We have also undertaken a special outreach ef-
fort, meeting with producers and producer groups in Washington
and around the country to listen to their concerns and to improve
everyones understanding of the role of the antitrust laws.
This afternoons hearing focuses on monopsony, and I think it is
fair to say that, more than some other industries, agriculture has
a structure that makes so-called monopsony concerns more likely
to arise. That is because the industry is characterized by many
smaller producers selling to fewer and larger processors.
We are sensitive to this and we look closely at so-called monop-
sony concerns in enforcement. Monopsony is the mirror image of
monopoly, but, of course, on the buying side rather than the selling
side. This is an antitrust concern because if market power is cre-
ated that enables a buyer to reduce the quantity it buys in order
to force down the per-unit price it pays, and if that depresses pro-
ducer incentives and brings output down below the competitive
level, then society is deprived of the benefits of the full amount of
production that should take place in a competitive economy.
The competitive harm to suppliers thus can lead directly to com-
petitive harm for consumers. So focusing on promoting competition
goes hand in hand with our taking enforcement action in a monop-
sony case when the facts warrant.
As you all well know, we bring three types of antitrust enforce-
ment actions typically. Under Section 1, we both criminally and
civilly prevent combinations and collusion that damage competi-
tion. We bring actions under our monopolization statute, Section 2.
And finally, of course, under Section 7 of the Clayton Act, we are
responsible for merger enforcement and for preventing mergers
that substantially lessen competition.

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We have been active under each of these headings. In our crimi-


nal enforcement program, we have taken action in a number of
cases that have resulted in savings to farmers in the case of feed
additives, herbicides, and otherwise, where they have been the vic-
tim of price-fixing and illegal cartel activity. Likewise, on the crimi-
nal side, a few years back we have prosecuted cattle buyers, where
they have been guilty of bid-rigging in the purchase of cattle.
In terms of merger enforcement, we have active now a case
called Southern Belle, in Kentucky, in the milk industry. This was
a case which actually fell below the Hart-Scott-Rodino thresholds
and has closed, but nonetheless we are engaged in litigation there.
As has been mentioned in previous remarks this afternoon, the
NDH/Hood dairy merger was withdrawn during the Departments
scrutiny of that merger. We have taken efforts to be more trans-
parent with parties about our concerns as we go through the course
of an investigation. In that case, that appeared to result in a trans-
action being withdrawn. It has been modified and a different trans-
action is under review now. That process is ongoing.
Likewise, the Cargill/Continental case and the Suiza/Dean case
were mentioned earlier. In Cargill/Continental, we explicitly recog-
nized the need to protect producers from monopsony concerns. And
in Suiza/Dean, while the transaction was not stopped outright, we
demanded significant divestitures in that transaction to protect
competition.
So we have been active throughout this market, throughout the
tools at our disposal to try to protect competition, and I look for-
ward to answering your questions about our work this afternoon.
Thank you.
Senator CRAIG. Hewitt, thank you very much for your testimony
and for being here.
Let me now turn to my colleague, Senator Grassley, for an open-
ing round.
Senator GRASSLEY. Mr. Pate, I would like to start by stating once
again that I think that you have statutory authority to pursue
monopsonistic activities. My concern is that the Department of Jus-
tice has not established specific guidelines or brought on enough
expertise to properly address that issue.
This isnt to say that the Department of Justice is doing a worse
job than any past Department of Justice. So, in fairness, I havent
been happy with Departments of Justice on this issue of agri-
business through several administrations.
Does the Department of Justice have specific authority to deter-
mine the competitive impact of vertical integration in agriculture
on farmers?
Mr. PATE. There is no question that we have the ability, and we
do in specific mergers look at vertical concerns. There is no ques-
tion that we have authority to look at monopsony, as well as mo-
nopoly. We did that explicitly in the Cargill/Continental case. That
was part of the Suiza/Dean inquiry I mentioned. It was part of
what we were looking at in NDH/Hood. So the answer to both of
those is yes.
Senator GRASSLEY. Do you follow specific guidelines that you
have in writing to measure?

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Mr. PATE. Our horizontal merger guidelines, for example, are


constructed around the more typical situation of seller side power
and monopoly. Monopsony is the mirror image of that. So the same
considerations that would apply on the monopoly side apply in ana-
lyzing monopsony.
That is not to say the cases are in every event the same. As I
have discussed, I agree with some of the comments made earlier
that agricultural markets can be different than other markets. We
look case by case at every transaction, but consistent with the
guidelines we have on the monopoly side, when we look at monop-
sony questions.
Senator GRASSLEY. You referred to Cargill/Continental. In that
merger, the Department of Justice required partial divestiture. Has
the Department of Justice performed any analysis to determine
whether that divestiture has preserved competition?
Mr. PATE. Typically, we do not do retrospective examinations of
markets, except that when we face future transactions or enforce-
ment actions, then we get the opportunity to look back in that con-
text. But it is not generally part of what we do to conduct studies.
We do have two sections within the Department who stay
abreast of agricultural issues and are specifically responsible for
them, and they do keep up in date in terms of market trends in
those areas. So I am sure that attorneys within those sections have
some of the information of the type you are talking about.
Senator GRASSLEY. Did the Department of Justice study hog-buy-
ing practices by packers and the impact of those practices on com-
petition before approving the largest pork integrator merger in U.S.
history?
Mr. PATE. If you are referring to the Smithfield/Farmland merg-
er
Senator GRASSLEY. Yes.
Mr. PATE. I was recused from that case. I did not participate
in it, so I cant tell you directly about the nature of that investiga-
tion. Before coming to the hearing today, I learned that the Depart-
ment sent to Attorney General Miller, in Iowa, describing its activi-
ties.
On that basis, I can tell you that certainly the answer is yes, and
that as would be the case in any case that we examine, we would
look at producers, consumers, the companies that operate in that
market, and determine what the market facts were in the case.
Senator GRASSLEY. Eighty-seven percent of all hogs are con-
tracted or packer-owned; 13 percent are deemed open-market.
Those are statistics I used in my opening remarks. In practice,
then, as I have previously said, 3 to 5 percent of the hogs traded
set the national price, and that surely happens in the Midwest.
Ninety percent of the hog marketing contracts are tied to a com-
posite average of the spot market for compensation. Many spot-
market hogs are sold under oral formulas, and open-market hogs
sold outside the western corn belt dont contribute to price-setting.
This leaves the remaining pool of spot-market hogs very limited.
Yet, those pigs set the price for all hogs tied to marketing contracts
throughout the country.
The western corn belt market is at its core made in Iowa, Min-
nesota, South Dakota, and Nebraska. This is where those 3 to 5

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percent of the true spot market hogs are located. When the Depart-
ment of Justice allows dominant integrators to command the south-
ern Minnesota-northern Iowa markets, you give integrators the op-
portunity to limit spot market purchasing and prices. Spot markets
are easier to manipulate than higher-volume markets. That is just
the plain fact.
So my question is does the Department of Justice recognize the
power integrators have in thin spot markets and that the western
corn belt is the dominant price-setting region for hogs in the
United States?
Mr. PATE. I read with interest some of the testimony on these
points that Professor Carstensen submitted. There is no question
that it is correct to observe that a more thinly traded market is
less likely to establish a competitive market price than one in
which there are more participants.
The antitrust laws in our reviews dont go generally to the ques-
tion of whether an auction or an open sale process, on the one
hand, or contracting on the other is to be, as a general matter, as
preferred form of contracting. When we do a merger analysis, the
question we are asking is whether the merger itself is likely to lead
to a decrease in competition. But we would look at the question of
the effect on both auction markets and contracted purchasers when
we do that.
Senator GRASSLEY. I would have two questions in writing, two
questions to follow up on my first two questions, and then I have
one question I did not ask. So I will submit those.
Senator CRAIG. Senator, thank you. We will submit questions in
writing. Senator Leahy also has questions that he will submit in
writing to all of our panelists.
We have a vote on. I am going to turn to Senator Specter to
make any opening comments and offer any questions he might
have. I am going to leave for the vote. If you would recess the Com-
mittee at the conclusion of your thoughts and questions, that way
we can be back and keep it going, and honor some reasonable time
to our third panelists, also.
Thank you.
Senator SPECTER [PRESIDING.] Well, thank you very much, Mr.
Chairman, and thank you, Mr. Pate, for the job which you are
doing.
Senator Grassley made a comment about his evaluation of the
Department of Justice. He has been active in evaluating the De-
partment of Justice for many years. I recall the first Attorney Gen-
eral that Senator Grassley worked with was William French Smith,
and Senator Grassley had some substantial disagreements with At-
torney General William French Smith.
One day at a social event at the Department, the Attorney Gen-
eral turned to me and said, why are you so critical of me?
Senator GRASSLEY. He was obviously getting us mixed up.
Senator SPECTER. What did you say?
Senator GRASSLEY. He was obviously getting us mixed up.
Senator SPECTER. Can you imagine such a blight on Senator
Grassley to be confused with me?
[Laughter.]

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Senator SPECTER. After the hearings on Justice Thomas, I heard


many reports.
What were those, Senator Grassley?
Senator GRASSLEY. Those reports were why was I so mean to
Anita Hill, and I never asked her one question. They were getting
me mixed up with you.
Senator SPECTER. You can see what a terrible situation he has
had for 23 years to have to sit next to me on the Judiciary Com-
mittee.
Senator GRASSLEY. That is why I am leaving now.
[Laughter.]
Senator SPECTER. So I advise you, Mr. Pate, to be very wary,
very wary of Senator Grassley even when he is gone.
Mr. Pate, I am glad that we are having this hearing on monop-
sony. That is a subject matter which is a word almost never, never
used, but one of great importance. I am very much concerned about
the impact on dairy farmers. As we have seen in Pennsylvania, the
price of milk at the store goes up and the price of milk to the farm-
er goes down. The fluctuations have been very extensive, some-
times more than $16 a hundredweight, and then in a short period
of time, less than $10 a hundredweight.
We have had a series of hearings on trying to understand why
it is that the farmer gets a lower price and the grocer gets a higher
price simultaneously. It may be that monopsony is the answer, that
a single buyer or a limited number of buyers are able to deal with
many purchasers to exert, in effect, monopoly power which drives
down the price to the producers.
Do you have any thoughts on that subject?
Mr. PATE. Well, again, it varies from case to case. It could be the
case that there is a monopsony problem on the purchase of raw
materials side, but no problem on the consumer side of the market
because there is vigorous competition on the selling side.
The reverse could be true, or there could be problems of market
power on both sides of the transaction. That could be true in the
dairy or other industries. So that would be something we would
evaluate case by case when we are reviewing a transaction.
Senator SPECTER. There is substantial competition in the mar-
ketplace for sellers of milk. There may not be for buyers of milk.
I am glad to hear your agreement that the Department of Justice
has full power to deal with monopsony, and I think there really
needs to be a very, very vigorous pursuit of that line.
We are still struggling with the problem of what is happening in
Pennsylvania and we are in the process of preparing legislation
which would tie the price of milk to the cost of production. We face
a very serious problem about having the small milk producer going
out of business, and at the current rate we may have an greater
problem with the small dairy producers. So the activities of the De-
partment of Justice could be very, very helpful.
I recollect your Departments intervention with the matter of a
small company in St. Marys. It wasnt milk; it was a manufac-
turer. But the Department of Justice can have a tremendous im-
pact. Just to show an interest and to seek an inquiry in an inves-
tigation can be very, very helpful.

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As Senator Craig said, we are in the middle of a vote and I am


going to have to depart momentarily to make the vote. We have 15
minutes and a 5-minute overlap. We have a very, very busy sched-
ule today trying to finish up the business of the Senate and I am
going to try to return, but I am not sure that I can. Mike Oscar,
my deputy, is here and we will be paying very close attention to
what your Department does on this important subject.
I have been advised that Senator Kohl has some questions for
you, Mr. Pate. So we would appreciate it if you would remain. Sen-
ator Kohl should not be too long in returning.
Mr. PATE. Thank you, Senator.
Senator SPECTER. The Committee will stand in recess for a few
moments.
[The Committee stood in recess from 3:29 p.m. to 3:39 p.m.]
Senator CRAIG [PRESIDING.] The Committee will reconvene.
Thank you all very much for your patience.
Let me turn to my colleague, Senator Kohl.
Senator KOHL. Thank you, Senator Craig.
Mr. Pate, as we have been saying, traditional antitrust doctrine
gives less scrutiny to buyers gaining dominant market positions
than to sellers gaining dominant positions via monopolies. This is
because monopsonies have the potential to result in lower prices to
consumers.
In the agricultural sector, we have seen in recent years tremen-
dous buying power gained by food processors, resulting in de-
pressed prices and substantial economic losses to farmers. In fact,
as we have said, the top 4 beef packers now control 81 percent of
the market, the top 4 pork processors control 59 percent 9of the
market, and the top 4 poultry processors control 50 percent of the
market. All of these percentages are going up considerably.
In light of this consolidation, shouldnt we now treat monopsony
in agriculture with the same scrutiny that we give to monopolies?
Shouldnt we be particularly concerned about buyers gaining domi-
nant market positions with respect to agricultural goods, Mr. Pate?
Mr. PATE. We are particularly concerned about it. I think it is
not fair to say that the law has established that there should be
less scrutiny, but simply that there have been fewer cases where
this comes up. We are more used to dealing with cases where the
alleged harm is on the side of sales, but we equally do look for mo-
nopsony problems.
I think there is some comment today that is repeated that it has
been established that monopsony can produce anticompetitive
harms at lower levels of concentration than monopoly. While I
think that is a claim that is asserted, it is not one that has been
studied by economists and backed up, but is one that should be
looked at. And if it could be proven that that is trueI know, for
example, Senator Kohl, you have been interested in this possibility
in the group purchasing area in the health care field.
This is something that I think we need to look at and determine
whether it is the case and then tailor our enforcement efforts ac-
cordingly. But we do look at monopsony concerns. As you say, we
do have to be concerned that we not act in situations where we are
preventing lower prices and better products to consumers. But the
concerns I am hearing here today are about situations where the

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monopsony side is causing losses to the producers, but yet that


isnt passed through.
Senator KOHL. Well, it has been pretty well demonstrated now
that over the course of many, many months, for example, milk
prices have been at record lows, or world-record lows, and there
was nothing even comparable reflected at the retail level in prices
to consumers. I dont think there is any question about that occur-
ring and with respect to what has obviously become a dem-
onstrated consolidation of cooperatives and providing farmers with
virtually no one to sell to except a single co-op.
How much more studying do you need to do before youI am not
trying to be disrespectful, but when do you make a conclusion that
this is not the right way in which we should be going and then try
and find a remedy, which I would be the first to agree is not easy?
Mr. PATE. Well, in particular cases we dont find that hard at all.
That is why, while there may be disagreement as to whether our
divestiture was the correct solution, in Suiza/Dean we took aggres-
sive action to require divestiture, why in the face of divestiture the
NDH/Hood transaction was withdrawn. That is why we are taking
action in the Southern Belle case. That is why we took action in
Cargill/Continental.
As to generally solving that problemand I know reference was
made to legislation that would peg retail prices to percentages or
to multiples of the raw milk price. That is something that is men-
tioned in Mr. Cotterills statement as New York legislation that has
proposed that. That type of direct price regulation and market out-
come-dictating solution is not one that the antitrust laws are in-
volved with.
So case by case, we are going to be there enforcing. Can antitrust
law address every non-antitrust structuring of the market that
some policymakers might think is appropriate? No, that is not
what it is intended to do.
Senator KOHL. I must say I still have this concern that when all
is said and done and another year goes by or 2 years go by, in spite
of this tremendous consolidation that is occurring and continues to
occur in, for instance, the beef packing industry and milk proc-
essing, and hogs and poultry, there will not beand I hope I am
wrongsufficient action on the part of your Department.
We were pleased when several years ago the Antitrust Division
appointed a special counsel for agriculture that we had requested.
It is important that a senior staff member be responsible for super-
vising and directing the divisions enforcement efforts, but aggres-
sive enforcement in this sector requires much more than just the
supervision of one senior official. What is important is that the
Antitrust Division devote sufficient resources and manpower to
monitor and investigate competition in the agricultural sector.
Could you please tell us the amount of current resources both in
terms of funds expended and staff employed on competition in the
agricultural sector, and has this changed significantly over, say,
the last 5 years?
Mr. PATE. I can give you a sense of that. In terms of budget
breakdown, I dont have a dollar figure in terms of hours spent. I
can tell you that we have two sections in which we have substan-
tial attorneys devoted to agricultural enforcement.

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We have a transportation, energy, and agriculture section that


deals with agriculture matters. In our Lit I section, we have a
number of attorneys who are specifically focused on the dairy in-
dustry. These cases often are pretty intense. In Suiza/Dean, for ex-
ample, in addition, we had 8 economists and 13 lawyers working
on that case while it was open. So at any given time, we may have
many tens of attorneys and economists working on agricultural
matters. It depends on what is active at the division.
Mr. Ross, as you mentioned, coordinates that. Agriculture is the
only area that has a specific special counsel assigned to it at the
division. I do not think, based on what I know, that there has been
a significant change in resources over a 5-year period. I would say
that there has been an increase in the attention paid to it. I think
Mr. Ross presence there is a part of that that is constructive.
I hope that is helpful in answering your question.
Senator KOHL. Some in the agricultural industry have argued
that the Department of Agriculture should have a greater role with
respect to examining consolidation in the agriculture industry. In
other industries, the Justice Department sometimes gives advice to
the department that regulates that industry.
For example, when the FCC is considering whether to allow a
local phone company to offer long-distance service, the Justice De-
partment gives the FCC advice on whether the local phone com-
pany has opened its facilities to competition.
Mr. Pate, how does the Justice Department make use of the De-
partment of Agricultures expertise when considering agricultural
mergers? Are there more steps that you might take to ensure that
USDA has a role in providing Justice with its expertise and views
regarding your review of transactions in agriculture?
Mr. PATE. Senator, that is a good question. We have a memo-
randum of understanding between the Justice Department and the
USDA in terms of our need to cooperate on mergers and other mat-
ters. We make use of that in every case.
I know even in the Smithfield matter, on which I know there is
a good deal of concern, I noticed that the letter to Attorney General
Miller specifically notes that we consulted and got input from the
Agriculture Department there.
I think comparing it to the telecom industry or others, I am not
sure that the situation calls for any sort of specific statutory as-
signment. I think it is something we should pay attention to. Since
I came on board, we have scheduled and put in place a meeting
with the front offices of USDA and the Antitrust Division to try to
share information on competition issues in agriculture, agricultural
issues that affect competition and our mission. So that is some-
thing we do readily and I think need to continue to do and do more
of.
Senator KOHL. Thank you, Mr. Chairman.
Senator CRAIG. Herb, thank you very much for those very
thoughtful questions.
I have one question only. There are others I will submit for the
record for the sake of time so we can get our third panel up. We
are in active business over on the floor at the moment and I think
the plan a series of additional amendments. So we will try to expe-
dite as much as possible.

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Attorney General Pate, I have to admit that the very word mo-
nopsony threatens to give me a headache, in at least attempting
to understand it. I think that Senator Kohl was pursuing this in
a variety of ways through his questions, but how difficult, or easy
for that matter, is it for you and your staff to assess the threat that
monopsony behavior possesses in the marketplace? Is there a rel-
atively easy formula that the myriad of your economists and attor-
neys look at?
Mr. PATE. I think there is not an easy formula. As some have
mentioned here this afternoon, we have somewhat less experience
with it. I have got a Websters unabridged dictionary in my office
and I looked up monopsony before coming over to the hearing and
it wasnt in therethe first word I have ever failed to find. Now,
this isnt a new dictionary, but the point I am making is that we
have had less experience with it. It is something that our econo-
mists have less experience with.
As I said, though, in many cases it would be the mirror image
of monopoly, to which we have written guidelines and more experi-
ence. But even in those cases, we dont have ready-fit guidelines.
We have to take each case on its own bottom and look at the mar-
ket facts.
Even in the context of something such as our HHI numbers, they
are not a cut-out formula that decides cases. So I dont think it is
necessarily something that is more difficult. It is something we do
have less experience with over time.
Senator CRAIG. Well, we thank you very much for your presence
here today. As I say, there will be a series of questions coming your
way so that we can have a complete and full record and we will
appreciate your responding to them, and your staff. Thank you
very much.
Mr. PATE. Thank you, Senator.
[The prepared statement of Mr. Pate appears as a submission for
the record.]
Senator CRAIG. Now, let us turn to our third panel today, con-
sisting of three distinguished professors, and maybe they will be
able to shed light on the why Websters failed to put this in at least
the edition of the dictionary that Mr. Pate has.
We will hear from Dr. DeeVon Bailey, who is a professor and ex-
tension economist at Utah State University. I understand, Dr. Bai-
ley, you live in the Cash Valley, which is a greater extension of
southern Idaho.
Mr. BAILEY. Well, we dont look at it that way.
Senator CRAIG. We will let you respond to that in your testi-
mony.
Also, we have with us Dr. Ron Cotterill, who is a Professor of Ag-
ricultural and Resource Economics at the University of Con-
necticut. Last, but certainly not least, we will hear from Professor
Peter Carstensen, who is George H. Young-Bascom Professor of
Law at the University of Wisconsin, in Madison.
Gentlemen, again, thank you. Dr. Bailey, please proceed.

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STATEMENT OF DEEVON BAILEY, PROFESSOR AND EXTEN-
SION ECONOMIST, DEPARTMENT OF ECONOMICS, UTAH
STATE UNIVERSITY, LOGAN, UTAH
Mr. BAILEY. Thank you, Mr. Chairman. If you think monopsony
is a difficult word, actually the correct term is more oligopsony,
which indicates that there are a few buyers, not just one.
Senator CRAIG. I just learned monopsony. Lets stay with that,
all right?
Mr. BAILEY. Indeed, I am from Utah and I am a professor and
extension economist in the Department of Economics at Utah State
University. I grew up in the small farming community of Paradise,
Utah, which is in the Cash Valley, certainly one of the most beau-
tiful places on Earth.
Senator CRAIG. We judge that by the flow of the Bear River.
Mr. BAILEY. Yes.
Senator CRAIG. It flows out of Idaho, through the Cash Valley,
into the Great Salt Lake. So we do expect and understand that it
is an extension of the greater State of Idaho. Thank you.
Mr. BAILEY. I will not argue with you on that point, Senator.
I did grow up working on my familys farm and ranch, and I
managed our familys cattle ranch for 2 years following my uncles
death in a farming accident. I love the cattle business, but I also
know firsthand the inherent business risk associated with working
in that business. I believe I also understand the concerns producers
have about the changing structure of U.S. agriculture, especially in
regard to packer concentration.
In 1999, a colleague, Lynn Hunnicutt, and I entered into a coop-
erative research agreement with USDA, GIPSA. This agreement
gave us access to a confidential data set which reported all of the
individual transactions for 4 beef packers in a single major beef
production area of the country over a 15-month period during the
mid-1990s. The data included information on packer purchases
from over 300 feedlots during the study period. The purpose of our
research was to examine the effect of transactions costs on the sta-
bility of packer-feedlot relationships.
In a competitive cash market, both packers and feedlot operators
should theoretically have choices about when and with whom
transactions take place. If relationships within cash markets are
found to be rigidthat is that market participants tend to have ex-
clusive relationships with each other over timethen several pos-
sible economic reasons might explain this behavior.
One possible explanation for rigid exclusive business relation-
ships might be that packers simply exercise control over feedlots by
somehow dictating the terms under which transactions take place.
Another possible explanation for exclusivity is that all feedlots offer
about the same price for cattle of the same quality, but that some
feedlots and packers simply are able to conduct business at a lower
cost than they would if they dealt with other feedlots and packers.
In other words, exclusivity may benefit both packers and feedlot
operators because transactions costs are minimized by doing so.
The final possibility is that exclusivity expresses itself because
one packer simply consistently offers a higher price to a feedlot op-
erator for his or her cattle, and as a result the feedlot consistently
sells to that packer. Economic theory suggests, however, that if

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large firms compete vigorously with each other that their market
shares will be unstable.
We used a spatial statistic in our research and we conducted two
tests. Our first test was less restrictive than the second and found
that, depending on the definition for our spatial statistic, the ma-
jority of feedlots, between 59 to 86 percent, sold primarily to just
one packer or primary buyer.
A few feedlots had two primary buyers, but almost none of the
feedlots had three primary buyers.
Our second test determined if feedlots tended to sell all of their
cattle only to primary buyers. We broke the data into two-week
time periods, which is a typical planning horizon between when
cattle are purchased and eventually processed, to determine if feed-
lot operators tended to switch between packers from time to time.
We found that when feedlot operators sold cattle, they almost al-
ways sold all of their cattle to their primary buyers. For example,
for all transactions both cash and contract during the study period,
feedlots sold only to their primary buyers 80 percent of the time.
This means that if the feedlot operator offered cattle for sale during
10 of the two-week periods, he or she sold cattle on the average to
the primary buyer or their primary buyers in 8 of those 10 periods.
Most feedlots sold only to their primary buyers in all cases, since
the median percentage of periods when transactions were only with
the primary customers was 100 percent. This suggests that feedlots
did little switching from their primary buyers during the study pe-
riod, and indicates that exclusive and very stable relationships ex-
isted between feedlots and packers during this 15-month period.
We tested the reasons for why exclusive, stable relationships ex-
isted between these feedlots and packers using regression analysis.
We found that the level of previous dealings between a feedlot and
a packer significantly influenced the proportion of cattle the feedlot
operators sold to that same packer in the current time period.
Also, downward adjustments in the proportion of cattle sold by
a feedlot to an individual packer were larger than upward adjust-
ments, but were done only infrequently, actually in only about 5
percent of the possible cases. This suggests that once a business re-
lationship has been established between a feedlot and a packer
that that relationship is more likely to continue in the future than
it would if no previous relationship existed.
It also suggests that feedlots frequently make incremental up-
ward adjustments in the proportion of cattle they sell to a primary
buyer, but that downward adjustments are made infrequently. Our
results indicate that previous proportions used as a proxy for all
transactions costs and the presence of a contracting relationship
between feedlot and packer all influence the proportion of sales be-
tween the feedlot and packer.
Other proxies for transactions costs, such as feedlot size and
market volume, were not shown to have a statistically significant
influence on the proportion of sales from a feedlot to a packer. Un-
fortunately, we had only information about successful bids for cat-
tle and not all the bids that were placed on cattle. As a result, we
could test for adjustments in the proportion sold only by using the
average price packers paid for a base type of cattle, and the base
was choice yield grade 3 steers.

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22

Although the sign for the test was positive, as expected, indi-
cating that as a packer with a higher price was present that some
adjustment was made, the test could not yield a reliable conclusion,
since the parameter estimate was not statistically significant.
The results of our analysis suggest that relationships between
packers and feedlots can be understood at least in part through
transaction costs. Consequently, these relationships may be mutu-
ally beneficial to both packers and feedlots. Perhaps the most im-
portant finding of our research is the fact that it is necessary to
incorporate transaction costs into economic models that are looking
at this industry.
Thank you.
[The prepared statement of Mr. Bailey appears as a submission
for the record.]
Senator CRAIG. Doctor, thank you very much.
Now, let us turn to Dr. Cotterill.
STATEMENT OF RONALD W. COTTERILL, PROFESSOR OF AGRI-
CULTURAL AND RESOURCE ECONOMICS, UNIVERSITY OF
CONNECTICUT, STORRS, CONNECTICUT
Mr. COTTERILL. Well, Mr. Chairman, my coauthors, Adam
Rabinowitz and Li Tian, who are with me here in the room, and
I would like to thank the Committee for the opportunity to share
our research with you today.
Milk prices are cyclical, but recently we have seen an extended
20-month milk price depression. Moreover, dairy farmers in the
Northeast have been the victims of what I will term a pincer move-
ment in policy during that period.
The first pincer is that Federal milk market orders have been re-
laxed to allow competitive market forces to set fluid milk prices. On
the face of it, this sounds positive. But the second pincer has been
that mergers have transformed the regions processing and retail-
ing markets so that we no longer have competitive market forces.
Stop and Shop, the regions leading supermarket chain, is now a
dominant firm in most local retail markets in southern New Eng-
land. Dean Foods is now our dominant fluid milk processor.
Antitrust enforcement has been active, as we have heard today.
However, it has clearly been inadequate. I know the track record
on a firsthand basis because I have been involved as economic ex-
pert for the regions State attorneys general in two of these key en-
forcement actions and several others in the greater Northeast. We
have tried, and failed, to stem the rise to dominance in both sec-
tors. Subsequently, there has been an increase in market power, a
subject that I now turn to.
Figure 5 in our written testimony summarizes our findings on
milk channel pricing in New England. In June 2003, farmers re-
ceived $1.03 per gallon for raw milk bottled. Processors collected an
additional $.60 for the wholesale price of milk. So the wholesale
price for milk delivered into supermarket coolers was $1.63 per gal-
lon.
Now, the regions top four retailers charge more than $3.07 for
that milk. This means they captured $1.45 per gallon for in-store
cost and profits. Our research at Pennsylvania State and the Uni-
versity of Maine indicate that store handling costs are, at most,

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$.40 per gallon in these large supermarkets. So that means their


bottom-line profits are $1.00 per gallon or more. That is after all
costs are accounted for.
Based on similar repeated surveys, we conclude that during the
farm milk price depression, New England supermarket chains bot-
tom-line profits per gallon were equal to or higher than the price
that farmers actually received for that very same milk.
Now, think about that for a moment. The bottom-line net profits
at the supermarket level are higher than the price that the farmer
receives for his labor and all his inputs and his effort to sell that
milk to the processor. We submit that this is economically ineffi-
cient milk pricing, as well as unfair milk pricing by almost any
standard of fairness.
The source of this excessive retail margin during the milk price
depression in the Northeast was primarily low farm milk prices,
not higher retail prices, and I will have more to say on that in a
moment. Large supermarket chains now deal from a position of
power when negotiating wholesale milk prices. Processors thus
have to deal in a similar fashion with farmers and their coopera-
tives. Consequently, farm milk prices in the Northeast are lower
than they would be in a competitive market channel.
How low? Well, if you look at July, Northeast dairy farmers re-
ceived at the mailbox $11.63 per hundredweight. In Wisconsin,
which by the admission of the economists at the University of Wis-
consin is an effectively competitive raw milk market, farmers re-
ceived $12.26 per hundredweight in July.
Now, lets think of spatial markets in milk for a moment. If, in
fact, the Northeast milk market were competitive, milk prices there
would be higher, not lower, than those in Wisconsin. They should
be higher by at least the amount of the cost to transport milk or
milk products from Wisconsin to the Northeast. And I repeat milk
prices in the Northeast were lower, not higher, than in the supply
basin of the upper Midwest.
Milk prices in the Northeast, absent the exercise of market
power against the regions farmers, could very well be $14 per hun-
dredweight or higher at the farm level. Our analysis also suggests
that if the Northeast becomes milk-deficient and must haul milk
from the Midwest, Northeast consumers will pay higher prices than
they would from an indigenous milk industry.
But what can we do about this? Policy options include the fol-
lowing. I will give the standard shibboleth of more vigorous anti-
trust enforcement, especially against the currently active Hood/
NDH merger. That is a horizontal merger with the Crowley plants
in Albany, New York, and Concord, New Hampshire. These plants
compete with Hood and others in New England. It should simply
be stopped. End of case. Simply dont allow it.
A second approach would be a strengthening of the Federal milk
market orders by elevating the Class I differential in monopsonistic
markets to protect farmers from low prices. After all, one of the
original reasons for establishing milk market orders was to protect
farmers from monopsonistic pricing by channel firms. I think we
have forgotten that over the last 10 years in our agricultural policy
area.

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Alternatively, States in the Northeast must consider policies that


address monopsonistic pricing. Effectively, we are beginning to give
up on the Federal solution. At the University of Connecticut, we
have developed a price collar policy that can lower consumer prices
and elevate farm prices without imposing price ceilings or explicit
price controls.
Price collars change the incentive structure of the market chan-
nel. Profit-maximizing behavior leads to prices that eliminate most
of the excessive channel profit margin. However, firms still earn
profits. It is not confiscatory of basic profitability.
Price collars also raise farm prices and lower consumer prices
during milk price depressions such as the one we have recently ex-
perienced. In the current environment where farm prices are rel-
atively high, they really would not be binding on the farm side, but
they would be binding, as the New York price gouging law is on
the consumer side.
Finally, I would suggest a couple of more general observations on
this area. Public empirical research by university economists is
shrinking up because we simply do not have access to the relevant
economic data. The Justice Department gets such data in merger
investigations, but often it is confidential and they cant reveal it
and they cant publish research on what they see.
At the University of Connecticut, over the last 10 years we have
spent over $200,000 buying scanner data by hook and crook from
the Information Resources, Inc. company. I have quietly talked
with one person or another over those years and basically bought
the data with no constraints.
Recently, IRI has finally shut the door on me, after being burned
three times, and now they have negotiated a very explicit policy to-
ward universities. The University of Wisconsin recently bought
scanner data. They cant reveal the name of the market that the
data is for, they cant reveal the name of the firm that the data
is for, and they cant even reveal the name of the brand that the
data are for. They also have to get approval from IRI for the pub-
lishing of their research results. I would submit that this con-
straint on access to data by public economists, in fact, is a serious
problem.
Finally, I would say that in antitrust policy there is a serious gap
between merger enforcement and Sherman Act enforcement. Any
merger that raises prices is illegal, basically, if we are talking
about a monopoly, or if it lowers prices if it is a monopsony. And
we often apply that, but people get through the slats.
The Sherman Act monopolization standard is so far removed
from what we see in this consciously parallel pricing by oligopolists
and oligopsonists that, in fact, we really cant get at these compa-
nies with the current antitrust laws. So we need to address either
tighter merger enforcement or a rethinking of the underlying laws,
or we have to go to external regulation rather than antitrust in
some of these market areas.
That concludes my testimony.
[The prepared statement of Mr. Cotterill appears as a submission
for the record.]
Senator CRAIG. Doctor, thank you very much.

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We have about 5 minutes left in a vote, so I am going to once


againI am sorry, Professorrecess the Committee. I will hustle,
vote, and be right back.
Mr. CARSTENSEN. I picked a late plane to go home on tonight.
Senator CRAIG. You are very fortunate.
Thank you.
[The Committee stood in recess from 4:10 p.m. to 4:27 p.m.]
Senator CRAIG. The Committee will reconvene. Thank you all
again for your patience.
Let us turn to Professor Peter Carstensen, from the University
of Wisconsin at Madison. Thank you.
STATEMENT OF PETER C. CARSTENSEN, GEORGE H. YOUNG-
BASCOM PROFESSOR OF LAW, UNIVERSITY OF WISCONSIN
LAW SCHOOL, MADISON, WISCONSIN
Mr. CARSTENSEN. Thank you, Senator. The advantage of the
break was that my name tag has now been correctly spelled, so
there was some benefit from that.
I am honored to be asked to offer my views on the problems con-
fronting farmers and ranchers in selling their products. The focus
of this hearing is on the monopsonistic character of those markets
and the potential for law, both antitrust law and market-specific
regulation, to restore open and competitive markets. I would like
to summarize my fairly extensive written statement in about six
points, if I may.
First, farmers are poorly served by the existing market struc-
tures and practices. They confront excessive concentration in agri-
cultural product markets that create strong inducements to engage
in unfair and discriminatory practices.
Second, there is clear evidence of abuse of the resulting buying
power, manipulation of public market prices to drive down the pri-
vate transactional prices, direct exploitation of sellers by low
prices, discrimination that denies equal access to the market, and
imposition of other unfair and exploitative conditions such as com-
pulsory arbitration.
Third, I think the harder problem which we have been talking
about today is how to restore fair, open, equitable, and accessible
markets. If there are unconcentrated markets, there is a strong
tendency to achieve those kinds of methods naturally through the
market process. Where they lack those inherent tendencies, where
there is concentration, where there is unequal informational power,
then we have the problem in the market. But law can play a very
important role in reducing the capacity to engage in strategic con-
duct and restore the balance between the parties. This is market
facilitation; it is not replacement of the market. We have two legal
systems that are relevant hereantitrust law and market facilita-
tion-type regulation.
My fourth point: Antitrust law should and can make an impor-
tant contribution. However, I think antitrust enforcers have failed
in two respects. First, and most importantly, they do not appreciate
the differences between monopsonistic buying power issues and
more familiar seller power issues.
We heard the Assistant Attorney General start off by saying that
monopsony is the mirror image of monopoly. You will notice that

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after the first recess when he came back, he began to qualify that
statement and acknowledged that maybe there were some dif-
ferences and they needed to be studied more. It is an important
recognition on his part.
Secondly, they need to develop relevant enforcement policies that
focus on the problems of monopsonistic power. The failure to do
this, I think, has resulted in a great weakening of the potential for
antitrust enforcement.
I suggest that there are four things that this Committee should
focus on in terms of antitrust enforcement policy and law: first, the
need to develop express buyer power guidelines for both merger
and restraint of trade analysis. I have elaborated on some of the
theoretical bases for that kind of separate focus, separate analysis,
because it is not a mirror image.
Secondly, as a number of you have emphasized, we need more ac-
tive enforcement of our current law against mergers and conduct
creating anticompetitive risksthe Farmland/Smithfield trans-
action. We have got areas of recurring collusion. We have got areas
of monopoly power that are known to the Justice Department. My
reaction to some of the Assistant Attorney Generals comments is,
in summary, listening is not enough. They have the resources, they
have the capacity. They need to be out doing active investigation.
Third, we need greater transparency concerning the decisions to
enforce or not to enforce. Today, I learned a little bit more about
why they might not have taken action in Farmland. They have
never made a public statement about that. A little bit more about
what they were trying to do in Suiza-Deanthey have never made
anything more than the most generalized kinds of statements
about that transaction.
I am very pleased with what I understand to be the proposal
from Senator Kohl and Senator DeWine on various antitrust re-
forms that focus in on strengthening the Tunney Act, another place
which will compel some greater transparency and disclosure. I
think that is a very important proposal.
Finally, I think that we really need to reconsider the judicially
imposed limit on those who indirectly are injured by antitrust vio-
lations having the ability to bring lawsuits. Specifically, Wisconsin
farmers were the victims of price manipulation in the cheese mar-
ket, but they were only indirectly injured. They had no remedy
under Federal law and they were unable to get remedy under State
law.
Nonetheless, all this said, antitrust law has inherent limits. I
think that is the best way to put it. We need to have other sources
of legal control. We have some now in the Packers and Stockyards
Act and the Agricultural Fair Practices Act. These are not very
well-developed areas of law. Worse, the Secretary of Agriculture
under both political parties, I must say, has failed to use the power
to make rules and regulations that could have facilitated fair and
open practices at least in some markets, especially livestock mar-
kets.
In my paper, I have suggested that there is an idealized kind of
elaborate statutory system that ought to facilitate agricultural
markets. Realistically, I think there are two presently pending pro-
posals that deserve your attention and support.

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Senators Grassley and Feingoldand they have already ref-


erenced this in their statementshave S. 91 that would prohibit
arbitration clauses in livestock supply contracts. The biggest prob-
lem is it (S. 91) doesnt apply in any other agricultural contract.
Senator Enzi and others have proposed S. 1044 that would im-
pose market-facilitating regulation on the use of supply contracts,
again limited to livestock markets. It should be much more general.
If we are going to have forward-looking contracts, they need to be
subject to a legal regime.
In sum, monopsony power in agriculture is a growing threat to
the operation of agricultural product markets. It is vital that the
law be used both to limit the growth of this power and to regulate
its use. Both consumers and producers will be better off if both
antitrust law and market-specific regulation are directed at the
problems that have arisen in this area.
It is my hope that members of this Committee will use their in-
fluence both to bring about legislative change and to insist on more
active and effective enforcement of the existing laws that address
these problems.
Thank you.
[The prepared statement of Mr. Carstensen appears as a submis-
sion for the record.]
Senator CRAIG. Professor, thank you very much for that testi-
mony.
Senator Kohl, questions of the panel?
Senator KOHL. I think your testimony in all three cases has been
really good and informative and enlightening. My conclusion, lis-
tening to you all, particularly you, Mr. Carstensen, is that if we are
going to do something effective about monopsony, it takes the Fed-
eral Government, whether it is the Justice Department or the Con-
gress, to step in and take a look at it all and come up with new
ideas, new thoughts, new rules, new regulations, new oversight,
new legal action or additional legal action to correct what I believe
you are all saying is a situation that is not good either for the pro-
ducers or for consumers and needs to be improved, as I said, at the
hand of the Government, as it is expressed through the Justice De-
partment and through the legislature.
Mr. Carstensen, are you saying that?
Mr. CARSTENSEN. Yes, very much so. Professor Cotterill made the
point about the need for better data. There is a lot of information
that exists which unfortunately scholars cant get access to, so that
it makes it much harder to develop and to prove the kinds of intui-
tions that we have about how competition is harmed in the mar-
kets.
Again, the Federal Government through the power of the Federal
Trade Commission and the Department of Agriculture to collect
data can be very helpful as part of that process of developing better
theories and then employing them effectively through legislation
and through enforcement.
Senator KOHL. Mr. Cotterill, what is your observation with re-
spect to what I said?
Mr. COTTERILL. I think that you are entirely accurate, sir. I ap-
plaud your idea that the Federal Government has a role to play in

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our agricultural markets. It is something I learned at the Univer-


sity of Wisconsin as a student 30 years ago.
The University of Wisconsin has been a strong player over the
last 100 years in defining markets, defining the rules that create
markets, and defining antitrust policies. I applaud all of that.
However, I am also to the point where I am beginning to think
that it is difficult at the Federal level to make that progress, and
I am almost becoming a fan of Antonin Scalia, of the Supreme
Court, that the States also should be empowered to deal with in-
dustrial policy questions that affect their citizens. I know that is
a very difficult area, as you are well aware of as well. So I think
we will see progress in both areas, hopefully.
Senator KOHL. Dr. DeeVon Bailey?
Mr. BAILEY. Yes, Senator. I believe my feelings are somewhat
less pronounced, I guess would be the way that I would state that.
I believe, for one thing, that the food system has been a great suc-
cess story in the United States, that we have all types of different
food and many, many different varieties that actually in real terms
is less in price for consumers today than it was 10 or 15 years ago.
So I am not as strong in my opinions as far as whether con-
sumers have been injured in some way. That doesnt mean that
they havent been for sure. The possibility exists that perhaps some
market power has injured consumers. But if you look just on the
surface of things, you have to applaud what agribusiness has been
able to accomplish in this country.
On the producer side, there have been questions for many, many
years. Actually, these same kinds of discussions were taking place
at the turn of the 20th century, too, within Congress and also out
in the country. People were concerned about the power exercised by
processors. So I think it has been a topic that we have discussed
for a long time.
It maybe is a more important topic than usual at this point be-
cause of the increased influence of the retailers and the power that
they are exerting on the market, or potential power that they are
exerting on the market right now. So I agree that it is an impor-
tant issue.
I also agree with the other two panelists that data really is the
issue. Without cost data, for instance, it is very, very difficult to
come up with a definitive answer regarding whether market power
exists or monopsony power exists in these markets.
Senator KOHL. Mr. Chairman.
Senator CRAIG. Herb, thank you.
Gentlemen, thank you for your response to those questions. Both
Senator Kohl and I were visiting on the way over from that vote
talking about the dynamics of that market out there and what we
might do about it in a way that continues to keep a viable market,
and certainly a market that the consumer and producer benefit
from.
I think you are right, Dr. Bailey. There is no question that if you
walk into any supermarket today in this country versus the rest of
the world, that demonstration of supply and variety of supply and
cost has to be an amazing success story.
On the other side are my producers in Idaho and in the Cash
Valley who have not recognized true return on investment of any

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magnitude that justifies reinvestment in a long while. I grow in-


creasingly concerned about the ability of the producer side of agri-
culture to capitalize itself unless they enter into contracts with
processor distributors that may not be in their best interest in the
long run, and yet that appears to be the situation.
Gentlemen, you watch these markets closely. All of you peer into
your crystal ball in a moment and tell me what you see as the
trend line and the effect. I can look backward. I probably have a
more difficult time looking forward.
Dr. Bailey, would you start?
Mr. BAILEY. I believe without question that the trend line is to-
ward more contracting, closer relationships in these markets. What
we have seen prior to the last few years is closer relationships be-
tween farmers and packers, mostly through contracting, and that
trend continues.
But perhaps even the more important phenomenon that is occur-
ring in the market now is closer relationships between retailers
and processors to the farmer. I think that if I had to choose one
trend that I see in food markets during the next decade, it is more
closely specified types of food products beginning at the retail down
to the farm level.
So that would suggest an even greater pressure to perform on
the part of farmers to specifications that are dictated at some place
above them in the channel. Probably the only way to avoid that is
some sort of intervention, but one also has to ask the question, is
that the right choice; would consumers actually support that kind
of intervention, because they are likely the ones that will end up
paying higher prices for food as a result.
Certainly, from the argument of fairness, there are concerns. As
I said, I grew up on a farm. I know the struggles that farmers face,
but we are on the horns of a dilemma in many ways in this regard.
How do we keep food costs low, provide high-quality food products
to consumers, but yet make sure that farmers can make a decent
living?
Senator CRAIG. If I go to Safeway today, I am going to buy only
Angus beef, or at least be led to buy only Angus beef. So some of
that type of quality or consolidation for the retail purpose, the
shaping of a product, is very much at hand.
Dr. Cotterill, would you respond to my broader question that re-
lates to trend lines and impact on both consumer and producer?
Mr. COTTERILL. Well, Professor Bailey has given the stock an-
swer from the agricultural economics profession. I mean, it is the
consensus view. The St. Louis Fed program and others all see this
increasing integration.
I am going to give you a different view. I think that unless some-
thing is done either through policies at the Federal or the State
leveland it starts with data, it starts with supporting research on
the externalities of these systemsProfessor Baileys prediction
will be the winner. But there are substantial externalities in this
system the way it is currently put together.
There was a recent article in the New York Times Sunday Maga-
zine on the amount of fat on Americans today, and attempting to
link it perhaps in an unscientific fashion to the structure of our

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food system and the nature of the way we deliver products to peo-
ple.
I think there is a link. It may not be proved perfectly well, al-
though 25 years ago at the University of Wisconsin Professor Bruce
Marion did a study that correlated the amount of fat on people to
the kind of diet and concentration in certain industries. So it has
been done. I think that is an externality that we need to deal with.
Another externality is the environmental and the cultural and
the social aspects of rural America. I was skiing in Switzerland this
winter and within 150 yards of the condo in the Swiss Alps were
three dairy farmers, each with about 25 brown Swiss cows. The
machinery that they used to cut the hay on the Alps looked like
gators that you see on golf courses, these tiny little machines that
they run around up there. I said how in the world can you justify
that kind of a dairy industry in Switzerland? Well, the spillovers
to keeping the Alps brush-free, to keep the mountain meadows the
way they are, are there.
This summer, I drove through northern Vermont on my way to
the Montreal ag econ meetings and I took a swing out through
Fairfax, Vermont, and others, and stopped at some of the rural
communities with churches and some of the events that were going
on. Just for me personally, to have those kinds of communities
it is like Richland Center, Wisconsin. That is a treasure; that is an
asset for this country, in general.
So I think that you have to come to ways to recognize that, and
I think the Europeanswe malign them for many of their pro-
grams, but with all due respect, I think that if we want a par-
ticular kind of rural America, we are going to have to do something
like that. So that is the other side of what Professor Bailey gave
you.
Senator CRAIG. Well, I dont dispute there is another side. My bi-
ases are clear. My wife just retired as a dietician with the National
Dairy Council. When we begin to talk about fat and food, we have
also got to talk about reinstating mandatory recreation and manda-
tory exercise with our grade school kids at the school level, which
they dont like today, and a rather, shall I say, sit-on-your-backside
society.
So there is a combination of things that have to occur, I think,
if we are going to look at regulations that determine how much fat
you can consume in a day or standards in that area. Buyer Be-
ware is a significant approach, I do believe, in the marketplace if,
in fact, it is a balanced one and it balances out.
Dr. Carstensen?
Mr. CARSTENSEN. Professor; I am not a doctor.
Senator CRAIG. All right, professor, thank you.
Mr. CARSTENSEN. My daughter has just gotten her M.D. degree,
so she is the Dr. Carstensen in our family.
Senator CRAIG. Well, in that relationship, then, you had better
maintain it.
Mr. CARSTENSEN. Right, right.
I think one of the things to bear in mind is that there is usually
more than one road to accomplishing desirable economic and social
objectives. If we dont do things to structure the fundamentals of
how agricultural markets operate, then the contracting, that which

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I have characterized as the serf-like status for farmers is very like-


ly to emerge because there wont be any other legal structure in
hand.
We had a hearing back about a year ago before the Senate Ag
Committee where Professor Koontz from Colorado State talked
about the things the Department of Agriculture could do much
more proactively to develop standards, to develop criteria, certifi-
cation systems, that would facilitate providing a greater variety
and specification of agricultural products without having to go
through the contractual system.
Contract is the default system. It requiresand this goes back
to something that Senator Kohl saidit requires positive govern-
ment action to construct a workable transactional market. That
isnt going to happen naturally because it is not in the interests of
many of the economic players.
So it seems to me again this is where one really needs to stand
back and say here is the path that we are going to go down if we
dont do anything. Are there ways to redefine that path, to preserve
a number of the things that Ron Cotterill has spoken about, while
still maintaining efficiency in the system?
Again, my view is there are, and we know from past experience
there are, many ways to achieve efficient, desirable consequences
in terms of the end product, the inexpensive food in the store. Lets
look for ways that are going to preserve farms, that are going to
preserve freedom of choice for farmers, because otherwise you are
going to wind up with, as I say, a serf-like situation where those
contracts are going to require an enormous regulatory system of
their own.
It is not going to be transaction cost-free. Again, the externalities
will be there. The kinds of problems in the rural countryside, the
kinds of environmental problems that will result from the restruc-
turing of agriculture will be there. You are going to have to deal
with them and you are going to look at them as costs of welfare
or costs of pollution. They are costs to the food system and I think
better designed relationships are going to avoid a lot of those costs
so that the net social cost will be lower even if the price of the food
may be a penny or two higher because we use a system that is
more farmer-friendly.
Senator CRAIG. Well, gentlemen, you challenge us and we are
glad you did.
Senator KOHL. Mr. Chairman?
Senator CRAIG. Yes, Senator Kohl.
Senator KOHL. We have not injected into this conversation, and
perhaps we wont today, but the Federal Government is providing
enormous assistance to farmers in our country. I think the stats
are that about half of farm income today comes from the Federal
Government, and that is because what the farmers are getting
from their buyers is insufficient.
So we are giving them back tax dollars to keep them in business
because we want to keep the rural economy there and we want to
keep our farming sector alive. If we pull the plug, that would be
a disaster. You know, we would have to have hearing upon hearing
and laws upon laws, and redo the whole terrain of our rural areas

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in America if we pulled the Federal plug on assistance. Half of


them would go out of business within a month or two.
So there is that that we need to understand, that it is not a self-
regulating mechanism that is going on right now. It is a Govern-
ment subsidization system, which I have voted for. I am not sug-
gesting we should pull the plug, but we havent figured out what
to do.
Dr. Bailey, do you have a thought on that?
Mr. BAILEY. Actually, I think my colleagues were being a little
bit hard on me.
Mr. COTTERILL. Oh, no. You represent the whole profession, sir.
Senator KOHL. Would you suggest that perhaps we should pull
the plug?
Mr. BAILEY. No, no, absolutely not. I think that there are
externalities associated with having a viable farming community in
rural areas in virtually every State. Farms maintain open space.
They are stewards to the land. There are many, many positive
externalities that are occurring as a result of farming.
I also believe that much of the innovation especially in the meat
industry is not coming at this point from the large processors. It
is coming from small firms that are trying to find niches and trying
to develop products that address consumer needs which the proc-
essors in many respects have not done as good a job as they could
have in the past.
So I think that the Government does need to view farming be-
yond simply the food that is produced by farming, that there are
other very positive things that occur because of farming. But also
it is important, I think, to maintain an environment where innova-
tion can occur in these industries.
Actually, there are a lot of innovative things that are taking
place in small-scale farming now. We should not ignore that and
should try to foster it, and I think that that is one way, along with
the money that is going into commodity programs, that possibly we
can help to revitalize some of the farming activities that are occur-
ring in the country.
Mr. COTTERILL. I am fascinated that you bring up the issue of
subsidies because that is something that has concerned me, be-
cause I think that with the Freedom to Farm Act back in 1995 or
1996, it was actually a victory for agribusiness rather than farm-
ers.
Farmers were sold a bill of goods on that one because, yes, we
are spending billions of dollars to keep our farmers in business.
But having said that, they really are constrained by the Govern-
ment just as they were constrained by the supply control that they
didnt like prior to this; as a matter of fact, maybe more so now
than then.
The real benefits of those low prices havent always been passed
on to consumers. In a non-competitive market channel, the market
power does mean that some of those lower raw prices stay with the
agribusiness firms. In a competitive channel, you get it passed on.
In non-competitive, you dont.
So you have a whole new lobbying game here in Washington
where you have the agribusiness processors and the retailers. They
like this program. I am not so sure it benefits farmers, but there

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is a complication to it as well because this program in many ways


is driven by the idea of global trade and the idea that, in fact,
Americas farmers are going to compete in a global market. There-
fore, we cant go back to the old supply control programs and the
higher market prices that we had.
I am not so sure that is true. If you look in some of our indus-
tries like dairy. I am not so sure that you couldnt go back to some
of the supply control, get some of these market prices a little high-
er and save the Government billions of dollars. I think we have to
reconsider supply control in our agricultural markets, like we had
for about 50 years before 1995. But I am not an agricultural policy
economist, so you probably might get a stronger answer on the
other side from some of them. But that is my perspective on it.
Mr. CARSTENSEN. I will just chime in that the subsidy issue cre-
ates again a set of distorted incentives in the market process and
it requires, as you start fiddling with this system, thinking through
fairly carefully how the subsidy incentives play off against the con-
tracting incentives, the other ways that we can interfere in the
market. It doesnt make your jobs any easier, I am sorry to say.
Senator KOHL. Thank you, Mr. Chairman.
Senator CRAIG. Well, gentlemen, we wish we could continue this.
I have enjoyed not only your testimony, but the conversation. I
think it is increasingly valuable. I think that one of the reasons
this hearing is being held is the frustration that we are all sensing
on our own part as it relates to policy and how that contains and
retains a balance that allows profitability at the production level
and the pass-through and reasonable prices and high quality to the
consumer.
Certainly, in my State there is really no segment of my agri-
culture that hasnt gone untouched by fairly extensive periods of
less than profitability. I have looked at the staying power of that
industry and its equities versus its debt structure. If you look at
and parallel that, you see a substantial problem growing out there
today that at some point is going to get spoken to.
Gentlemen, we thank you. I will say in closing this hearing that
the record will remain open for 7 days for any written submissions,
and there will be some questions coming your way and we will
thank you for your response to those. Again, we thank you all for
being here.
The Committee will stand adjourned.
[Whereupon, at 4:59 p.m., the Committee was adjourned.]
[Question and answers and submissions for the record follow.]
[Additional material is being retained in the Committee files.]

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